STATE OF THE 3PL HEALTHCARE PROVIDER FREIGHT MANAGEMENT MARKET: PAST, PRESENT & FUTURE
By Gary Galloway, Former Co-Founder and President of FDSI Logistics and current Founder/CEO of DCI4PL an Independent Healthcare Freight Management Consulting Firm.
“You have to know the past to understand the present” Carl Sagan, American planetary scientist, astronomer, visionary and idolised by Elon Musk
PAST STATE: UNCOVERING AN ANNUAL $1B+ HOSPITAL DECADES OLD FREIGHT COST BLIND SPOT
First, at the inception (CIRCA 2000), the 3PL freight management service emerged as some 5,500+- US hospitals for decades blindly allowed their medical product suppliers to profit on inbound freight shipments by charging them back on their product invoice at mostly carrier (FedEx & UPS) list price. Annually, it was estimated to be a $1B+ expense to the hospitals and $500M+- profit to the suppliers. In the late 90s I was contracted by David Ricker the then CEO of BROADLANE to work with three of their hospital members’ supply chain executives educating them and their team on how they could take control of their high freight cost inbound medical product supplier shipments. However, after a year of modest success, it became clear to me their supply chain management would prefer to outsource the expertise if they didn’t have to directly pay for the service. “We can’t spend money to save money.”
My experience and three other visionaries and their efforts lead to the creation of HLS, FDSI Logistics, TRIOSE and later OPTIFREIGHT/Cardinal Health. These were the original healthcare provider freight management 3PLs and with it, the birth of the ‘broker buy/sell pricing model.’ Before the GPOs got involved in the early 2000s, the 3PLs were successful in negotiating volume discounts with FedEx or UPS where they could offer the hospital a discount that would significantly reduce what the suppliers were charging them on their product invoice and provided them with their margins. This became and mostly continues to be today the 3PL broker buy/sell model. When the supplier compliance got to be in the 80%+ range, it was estimated that we collectively took out $500M+- a year in hospital supply chain freight cost. All of us that were there in the beginning had great pride in this forever changing event. We disproved the naysayers that said it couldn’t be done.
But it didn’t happen overnight for the following reasons:
1. There was significant resistance from the suppliers to comply with the hospital’s request to stop billing them for freight on the product invoice and ‘ship collect/third party bill to the hospital’s freight management 3PL.’ They wanted to protect their freight bill back margins.
2. Hospital supply chain management was skeptical and concerned their suppliers would charge more for the product if they lost their profit on freight. Imagine that with AMAZON’s free freight model today?
3. Accounts payable departments didn’t want the additional administrative work if the 3PL’s billing didn’t match their purchase orders and other accounting requirement concerns.
4. Hospital IT Departments had little or no time to work with the 3PLs to accommodate the suppliers’ and hospitals’ requirements to make it a smoother transition from supplier prepay and bill back on their product invoice to collect/third party bill to the hospital’s 3PL.
5. The GPOs got significant push back from the suppliers not to support the 3PLs. It was a difficult position for them to be in, trying to satisfy their hospital members and the suppliers under contract paying them their administrative fee. A double-edged sword. The list of issues and concerns went on, but in the end the 3PLs developed and provided the required services while the hospitals continued pushing their GPOs (MedAssets, Novation, Premier and HealthTrust/HPG) to negotiate discounted pricing on behalf of their members. In time, the GPOs saw the opportunity to generate additional revenues (3% rebate fee) and soon thereafter, one by one the 3PLs contracted with the GPOs who established the carrier (FedEx & UPS) discount tiers (1- 4) pricing model which also accommodated the 3PLs’ margin requirements. A triple win!
PRESENT STATE: 3PLS’ CAPTIVE FREIGHT MANAGEMENT MARKET
Today, there are three primary 3PLs that have a captive hospital customer freight management market (OPTIFREIGHT/Cardinal Health, Triose/AmerisourceBergen and Vantage Point Logistics). The annual estimated hospital and non-acute care spend is back over $1B+ and it will continue to grow each year with FedEx and UPS increasing their book rates by 5%/+-. This annual increase generates additional gross revenue and increased margins where the 3PL’s have negotiated a lower book rate increase (2% to 3%). The question that is asked every January is, ‘how much more revenue and profit will we generate from the FedEx or UPS increase this year?’ I know, I was one of them. Effective January 2025 the FedEx and UPS book rate increase is 5.9%!
Since the inception of the 3PL healthcare freight management market some twenty-five years ago, there are very few hospital systems that don’t have a 3PL or some other form of a freight management service in place today. The 3PLs spend considerable time pursuing their competitors’ accounts and lose or win based upon service and or cost issues. In a few hospital cases, some have moved to a self-managed model negotiating their own carrier agreements, or the ones they have access to with their GPO.
So, on the one hand you have a competitive 3PL market. But on the other there is a ‘state of complacency’ with a significant number of hospital management and their 3PL service providers wanting to protect their high margins. It’s an unspoken topic and with some denial if challenged for sure. In either case, it is preventing a lot of hospitals from reducing their increasing freight costs. This topic is discussed in more detail below. What follows is a list of specific actions and projects we recommend supply chain management step back for a moment and ask themselves, “why wouldn’t we do this?”
CONDUCT A 3PL RFP: IS THERE A 3PL SERVICE AND SIGNIFICANT COST REDUCTION ALTERNATIVE FOP YOU IN THE MARKET ‘TODAY?’
When was the last time your hospital system conducted a 3PL RFP? In most cases if you were to conduct a competitive bid process or outsource it to an independent freight management consulting firm, the result will be very aggressive pricing and potentially additional rebate incentives from the competing services that doesn’t have the business. This will put the pressure on your incumbent 3PL to match their offer or improve upon it. Our firm has seen this scenario play out with virtually every client project we have been engaged with when the hospital’s 3PL freight management business is put to bid.
3PL COST SAVINGS REPORTS: DO THEY REFLECT ACTUAL SAVINGS?
Are your monthly 3PL savings reports actual savings, or simply comparing the net carrier discount rate to the (FedEx or UPS) book rate? What you really want to know is what are they doing to reduce the average cost per shipment (ACPS)?’ The ACPS is the most accurate measure of inbound and outbound freight cost savings with small parcel shipments. Your 3PL producing these reports is one thing, but how proactively are they in working with your to maximise the savings potential?
Note: In general terms there are five ways to reduce the average cost per shipment:
1. If you are under a GPO/3PL carrier rate discount agreement, make sure you are on the correct revenue volume tier (1-4). If not, make the request and get on it. You also want to know ‘why you weren’t put on it.’
2. Your shipment volume could have increased resulting from an acquisition or by incorporating your hospital’s non-acute care freight revenue to the managed program. You may also have a legitimate claim for the lost savings.
3. When putting your 3PL business to bid include your direct FedEx and or UPS shipment/revenue volume for leverage in the negotiation.
4. Improved shipment Mode Optimisation. This topic is discussed in more detail below.
5. If you have two or more ‘high shipment volume competing suppliers’ that have the same quality product and the one you purchase from now is a significant distance from your receiving hospital location and is shipping AIR, consider changing to the supplier closest to you where they can ship GROUND with no delay in delivery.
Now, let’s turn to the process. Stay with me. The details in the process matter.
MODE OPTIMISATION MOST TALKED ABOUT AND MOST OFTEN UNDERACHIEVED.
We are often asked, ‘what is the best way to approach reducing our 3PL freight cost through mode optimisation?’ The answer is simple, but the process to achieve the optimum results takes work and cooperation with your 3PL service provider and the suppliers shipping to your facility or multiple facilities. Below is the process we recommend: 1. Start by asking your 3PL to provide you with the Top 10 Suppliers that are shipping AIR (NDA, STD and 2 Day) and include the annual amount they are billing you. 2. Ask purchasing to generate a PAR level report for each one of the 10 suppliers under review. How many shelf days do you have before the product needs to be replenished? 3. Where you have a sufficient PAR level for 3 to 5 days for the suppliers under review, ask your 3PL to generate a report that will show you the transit time and cost of shipping GROUND versus AIR using a one-month shipment sample that you can annualise to see the potential cost savings. Continue this process with the next 10 group and so forth until you are satisfied that you have maximised the Mode Optimisation opportunity for every supplier where you have a sufficient PAR level to ship GROUND in lieu of AIR. Note: To validate the success of the effort in moving from AIR TO GROUND with each one of the suppliers you have designated, your 3PL becomes the gatekeeper of the conversion process and provides you with the cost savings reports to confirm the savings.
ADDING AND DELETING SUPPLIERS FROM THE 3PL MANAGED PROGRAM
Adding Suppliers
First, let’s address how many complaint suppliers are not in your 3PL freight management program ‘today’ that should be. Just because a given supplier wasn’t compliant a year ago, three years ago or you have never done a comparison, below is the recommended approach to determine which ones should be added and which ones should be deleted, if any.
1. Generate a most current 12 Month supplier payable report. These are the suppliers that are still charging back on their supplier invoice. You may be doing this routinely already, but now you can take the next step to potential additional freight cost savings.
2. To start, identify the Top 10 suppliers still charging your hospital system back for freight on their product invoice from the supplier payable report and their annual charges.
3. Next, provide your 3PL with a sample of the suppliers’ invoices and ask them to price what they would charge for the same shipments. Note which suppliers are not a sole source!
4. Determine what the ‘reason (s)’ is that the supplier won’t comply. For example, they require notes in the PO for every order/shipment; their system can’t accommodate the request (really?); terms and conditions, etc.
5. If the supplier is not a sole source and the alternative supplier (s) will comply and your 3PL’s freight costs are lower as well, then you are in very good negotiating position with the incumbent supplier. Question: Why shouldn’t every supplier be compliant when they are costing the hospital more than your 3PL shipment cost; annually, what is this costing your hospital per year in additional supply chain freight costs ($100K, $500K, $1M?). And again, where you have suppliers that are not a sole source and they are costing you more than your 3PL, don’t assume because your 3PL says they are not compliant you don’t pursue it on your behalf. Challenge the status quo!
Deleting Suppliers
How many suppliers in your 3PL managed program should be removed because they charge more for freight than your supplier does ‘today?’ The pricing comparison analysis is the same as adding suppliers, but in reverse. Identify the Top 10 suppliers that are under the 3PL managed program. Provide your supplier with shipment samples, asking them to provide you with what they charge. Repeat the process with the next 10 and so on until you are satisfied with the outcome of the results. What we can say with absolute certainty, is that there are suppliers today that should be removed from most inbound supplier freight managed programs that will result in additional cost savings.
MERGERS & ACQUISITIONS: AN OPPORTUNITY COST REDUCTION OFTEN OVERLOOKED
Has your hospital system been one of the acquirers in the past 12 to 36 months?’ If so, your shipment volume and revenue increase to your 3PL may qualify a move up to another higher GPO/3PL contract carrier discount tier (1- 4). We have seen with some of our hospital client projects the GPO/3PL higher carrier discount tier didn’t get implemented or wasn’t implemented until a later date. Where this is the case, you should file a claim and be reimbursed for the difference and have the higher carrier discounts implemented immediately!
CAPITAL EQUIPMENT: THE HIDDEN FREIGHT COST UNCOVERED
Did you ever wonder how much hidden freight cost there is in the purchase of capital equipment, especially when you have a large construction project for a wing addition or the building of a new hospital? As you know, whatever the construction cost is approximately 20% to 25% will be allocated to the purchase of new capital equipment and with it, supplier shipments with little or no visibility of what the freight costs are as most are buried in the product cost. If you can’t see it, you can’t manage it! We have seen hidden freight costs range between 3% to 7%+ of the product cost and once identified and compared to an actual freight charge, the hidden freight cost is almost always more than an actual freight charge as it is typically a percentage of the product cost. Uncovering the hidden freight in capital equipment may be the last domino to fall in the 3PLs’ and their hospital customers' pursuit of generating additional freight cost saving. But until hospital Executive Management (Supply Chain, Facilities and Finance) and their 3PLs’ recognises there is a clear opportunity to unbundle the hidden freight costs of capital equipment suppliers like they did some twenty-five years ago with the medical product suppliers, it will remain invisible. Imagine if on a major construction project (Wing addition, renovation or a ground floor up new facility, you could reduce the freight cost by $100K, $500K or $1M? In either case you can now purchase more new equipment of help to off set a budget over run. With the effort?
FEDEX & UPS AUDIT RECOVERY PROJECT: OUTSOURCE IT!
Is it time for your hospital system to have an outside independent audit of your direct FedEx and or UPS spend? We have seen many cases where the hospital with these two carriers is not on the correct GPO/3PL discount tier; have far too many FedEx or UPS direct accounts with little or no discounts and significant billing and accessorial fee errors. The best option is to outsource this to a Freight Audit & Payment (FA&P) company as this is their core competency.
OUTBOUND FEDEX & UPS USAGE: LEAST ADDRESSED AND MOST OFTEN ABUSED
Having conducted 100s of hospital outbound FedEx & UPS internal audits and analysis as a 3PL and more currently as an independent freight management consulting firm, we can say without hesitation this freight cost category needs to be reviewed more proactively by management to make sure the hospital internal users not ship via air when there is no real rush for the shipment to arrive the next day, or two days for that matter. You can have a hospital internal employee shipping policy and approval process to not ship air unless necessary, but you need a ‘gatekeeper’ as a check and balance. The most likely candidate is your 3PL when the shipments are moving under the GPO/3PL carrier pricing and hospital management when it’s under a direct carrier agreement. And it is still recommended that you have an outside auditor conduct their audit as well. Keeps everybody honest.
DIRECT FEDEX & UPS AGREEMENTS: CONVERT TO YOUR GPO/3PL AGREEMENT FOR IMPROVED PRICING
First, if your healthcare system has agreements with one or both carriers, they should be compared to the discounts provided through your GP0/3PL contract. In most cases we have found that the hospital’s GPO/3PL FedEx or UPS discounts are higher than the direct carrier agreements. In some cases we have seen where there are no discounts in place within various departments of a large hospital or worse, with multiple hospital system locations that negotiated their own individual agreements. Bottomline, where your hospitals system’s direct FedEx and or UPS discounts are less than your GPO/3PL, issue an internal memorandum announcing the move from the current carrier(s) direct agreement to your GPO/3PL agreement. Your 3PL will be the ‘gatekeeper’ to ensure a smooth transition and provide comparative analysis reports that will validate the savings. We also recommend that after the full transition has been completed, see if the additional revenue to your 3PL qualifies for a higher discount tier (1- 4) under the terms of your agreement.
FUTURE STATE 1.0: SEPARATE THE 3PL CARRIER COST FROM THE SERVICE COST
The Future State 1.0 is EMERGING and DISRUPTING the decades old GPO/3PL broker buy/sell hidden high margin pricing model by ‘separating the carrier cost from the operational service cost.’ This provides100% pricing transparency and results in the lowest cost that no GPO/3PL carrier discount tier (1-4) can match. There are two hospital categories to address in the Future State. Not-for-Profit and For-Profit hospitals.
Not For Profit Healthcare Systems
With Not-For-Profit Hospital Systems there is a 30% to 35% cost reduction opportunity with the lowest FedEx and UPS rates that range from 30% or more lower than the GPO/3PL carrier discount pricing tiers (1-4). You will see your current $30 to $40 (or more) a shipment drop to $15 to $20. There is one 3PL where this is their model. 100% bring transparency. No hidden fees.
So, why haven’t more of the 3000 +- Not-For- Profit hospitals taken advantage of this unique lowest carrier cost (FedEx & UPS) and full-service conversion opportunity?
1. They may think they have the best 3PL service and carrier pricing available to them when they more often do not.
2. With large multiple hospital systems, a high six or a seven-figure freight cost reduction project doesn’t always get the attention of Supply Chain Executive Management. Arguably, you can do both if the potential ROI is significant; or out-source it to a freight management consulting firm.
3. They are complacent knowing they have a freight management program in place. However, if you run a progressive supply chain department that wants to improve on all your supply chain related costs (including freight), complacency isn’t in your play book.
For Profit Hospital Systems
The key in opening the door to significantly reduce your hospital systems 3PL freight costs, is to put this business out to bid as outlined above. This will serve as a wake-up call to your incumbent 3PL that it isn’t business as usual. We know through our client engagements there is more flexibility in the ‘carrier pricing and rebate game’ the 3PLs have when a competitive bid process threatens the loss of the account. By putting the 3PL business to bid you will see, on average, a 10% to 15% (sometimes more) cost reduction.
If you don’t have the time or resources to conduct the bid process, you have the option of outsourcing it. Our firm can assist you if called upon.
FUTURE STATE 2.0: THE EMERGENCE OF AI: IS THIS THE NEXT GENERATION IN HOSPITAL FREIGHT MANAGEMENT?
That will be another white paper coming in the very near future and the future is sooner than later. Stay tuned.
In summary, thank you for reviewing this White Paper. I hope it will be helpful in areas where you know your incumbent 3PL can be more proactive in generating additional freight cost savings. And if you are a Not For Profit hospital system, you have the opportunity for a 30% tom 35% cost reductions described above. If you would like tom consult with me on any of these topics addressed above, please contact me at your earliest convenience.
Gary Galloway
Founder/CEO DCI4PL
949-439-4728
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